Often, Risk management is viewed as a control function intended to prevent loss or failure. As such, most organizations expect their risk managers to focus on what can go wrong. But can they also create a competitive advantage?
The role of Risk Management in the modern organizations is evolving in a fascinating way. From being support teams minding the fences for specific business units, risk managers have now become resources for senior management to understand and mitigate the key risks that run across their businesses. As such, there has been a rising demand for professionals who can help companies identify, evaluate and address risks at both business unit level – first line risk – as well as at a corporate level – Enterprise Risk. But while they focus on protecting the business from foreseen and unforeseen risks, they can also be valuable resources for creating competitive advantages.
Enterprise Risk teams enjoy a unique vantage point where they have a fairly good overview of the businesses – how they run, what risks they face, how these aggregate at the corporate level, and best practices for mitigating common risks. And they can bring this view to create strategic advantages for the business in various ways.
First, the Risk teams can help the businesses review their view of risks applicable to them along multiple dimensions – financial, operational, market, reputational, technology, etc. – and help ensure completeness of their risk assessment. This can help uncover not-so-obvious risks for a business, such as impact of geopolitical risks on their reputation. Second, they can help them differentiate the consequential risks from inconsequential ones. This is important as the resources are usually constrained and understanding what to prioritize will enable the business optimize resources for growth.
Lastly, risk managers can help the businesses decide what, if anything, they should do about the various risks. This is a less recognized but very powerful activity that Risk teams can play for the organizations. The typical thinking about risk management is that once a risk has been identified as material, the business should try to avoid it through whatever means available. However, there are many different risk treatments that are each perfectly acceptable and can help the business take informed bets, optimize capital allocation and improve returns.
A business may choose to accept risk. For example, in restaurant business reservation cancellation is a known risk and most restaurants accept that risk as it is. Some restaurants may choose to avoid risk by not taking reservations at all. Others may even try to mitigate the risk by overbooking, expecting a certain number of cancellations. Some restaurants, especially the sought after ones, price that risk by taking a non-refundable booking guaranty. And if they’re using third party reservation services, they may even transfer the risk by asking their service providers to guaranty a certain number of reservations. The right course of action will differ for each business based on a variety of factors, but understanding the options and choosing the right one can meaningfully impact the business.
As with many business functions, it is really up to the organizations to decide how they want to utilize their risk management teams. However, those who can leverage their Risk teams beyond their traditional roles of putting up guardrails and enforcing policies can realize strategic benefits that give them an advantage over their competitors.